The drive to offer investors in mainland China more diversification opportunities continues apace with foreign fund firms at the vanguard after one of them this week became the first to offer a non-traditional strategy.
The extra diversification potential brought by foreign asset managers is thought to be keenly expected by the investment community in China including regulators, investors, and service providers.
London-headquartered Man Group, one of eight foreign asset management firms so far licensed to sell private funds to institutional and high-net-worth investors in China, obtained regulatory approval to launch its first onshore investment product -- a quant strategy focused initially on listed futures.
The green light follows China’s pledge last month to further open up domestic markets to foreign institutions and create new opportunities for foreign players to help local investors better diversify their portfolios.
“Foreign asset managers have a competitive edge in terms of those non-traditional strategies," Melody Yang, Beijing-based partner at law firm Simmons & Simmons, told AsianInvestor. "Compared to China's asset management market which is still very young, [the] foreign asset management market has developed for more than decades.”
She added that Chinese investors would likely seek to further diversify their investment strategies if they offered higher returns,” describing comparatively new non-traditional ones as potentially “very appealing”.
That echoes a May speech by Lou Jiwei in which the chairman of the National Council for Social Security Fund (NCSSF) said the state reserve pension manager would “actively” try new financial instruments and investment strategies to better diversify investment risks and improve returns.
That move severely dampened the development of equity quant strategies, which would normally need access to hedging through the trading of stock index futures. So, currently, outright futures trading is among the quant strategies that have so far developed best in China, the unnamed analyst said, citing quant teams active in cities like Shanghai, Shenzhen and Hangzhou.
For the time being Man is understood to only want to focus on institutional fund of funds investors, with whom it's easier to work with from an operational perspective, rather than with any individual investors, the source said.
As well as announcing the removal of foreign-ownership limits on mainland Chinese banks on November 10, Beijing raised the cap on foreign ownership stakes in asset managers, insurers, and securities companies to 51% from 49%
China's fund regulators are also embracing change, Simmons and Simmons' Yang said, noting the attempts to include robo-advisers in its new regulatory framework in November.
Seeing the trend, global asset managers are expected to allocate more resources into macro, credit and equity research as well as increase investments into China (and the Asia-Pacific region in general), Frank Wu, China general manager and chief representative of Alternative Investment Management Association, said.
But being able to navigate through the regulatory hurdles, compliance, and required risk management remains a key requirement also for foreign asset managers looking to enter the market. “It is particularly important in China [because] when the asset management market is developed so rapidly, so is its regulatory framework,” Yang said.
That’s why Man doesn't plan to use automated orders, high frequency, or arbitrage trading as part of its onshore quant strategy, to be fully compliant with the spirit and letter of Chinese regulations, a source familiar with the matter told AsianInvestor, on condition of anonymity.
There are currently eight foreign asset managers with PFM licenses from Amac. Besides Man, Fidelity and UBS Asset Management have so far also registered private funds in China. AsianInvestor has also learnt that Fullerton and Aberdeen Standard Investments plan to launch equity funds, while Neuberger Berman will launch a multi-sector fixed-income fund.
As of end-November, there were 8,294 private fund managers that invest in public securities in China with total assets under management at Rmb2.28 trillion ($345 billion), according to Amac data.